Constellation and EDF: A marriage gone south

Today, with EDF seeking to torpedo the Baltimore company's plan to sell itself to Chicago-based Exelon Corp., the relationship between the former "best friends forever" has clearly deteriorated.

The French utility — Constellation's second-largest shareholder — is pushing Maryland energy regulators to reject the proposed $7.9 billion merger. A consultant hired by EDF is scheduled to testify Wednesday as the second week of hearings continues before the Maryland Public Service Commission.

"It's a remarkable change in events," said Paul Patterson, an analyst at Glenrock Associates in New York, adding that EDF, once "so supportive" of Constellation, now is one of the firm's most vocal opponents.

That hostility was on display last week, when an attorney representing EDF grilled Constellation Chief Executive Officer and Chairman Mayo A. Shattuck III and Exelon Chief Operating Officer Christopher M. Crane about the timing of their negotiations.

The lawyer stressed previous revelations that talks between Constellation and Exelon had begun at around the same time that the Baltimore company and EDF were trying to resolve a dispute over developing a third nuclear unit at Calvert Cliffs in Southern Maryland.

Steve Wolfram, EDF's general counsel for development, said in a statement Monday that the testimony from both executives confirmed that Exelon had sent a signal "loud and clear" to Shattuck, who, Wolfram said, understood that "Constellation would have to continue to turn its back on new nuclear development at [Calvert Cliffs 3] if Constellation wanted to move its merger discussions with Exelon forward."

EDF, which owns 7.2 percent of Constellation shares, plans to vote against the merger. Both companies have scheduled shareholder meetings for Nov. 17.

In a statement Monday, Constellation said that it remained "working partners" with EDF on their nuclear joint venture and that the merger with Exelon "does not affect this partnership or our work with EDF on policy and other matters of mutual interest."

EDF owns nearly half of Constellation's nuclear plants in New York and Maryland.

The marriage of Constellation and EDF began with great promise.

The two companies came together in 2007 when they created UniStar to develop nuclear projects in North America, including at Calvert Cliffs, with the aim of creating a U.S. nuclear renaissance after a 30-year hiatus.

A year later, with Constellation teetering on the brink of bankruptcy amid the financial-sector meltdown of late 2008, EDF came to the firm's rescue when it agreed to buy nearly half of the Baltimore company's nuclear business for $4.5 billion.

Constellation, which had initially agreed to a takeover by billionaire investor Warren E. Buffett, instead accepted the deal with EDF, allowing the company to remain independent.

As allies, the two companies rallied supporters as they pledged to pursue a third nuclear unit at Calvert Cliffs, though no final decision on building the reactor had been made when the companies joined forces.

In gaining approval for that deal, EDF and Constellation agreed to provide a $100 one-time rate credit to residential customers of BGE, Constellation's regulated utility. The two companies also contributed $36 million to Constellation's charitable foundation, while EDF moved its U.S. headquarters to Chevy Chase.

But the union effectively ruptured last fall when Constellation pulled out of plans to develop the proposed reactor — a move characterized by EDF as a unilateral decision. Constellation blamed costs associated with a federal loan guarantee and said changing market forces would make building new nuclear plants economically unfeasible.

Even before Constellation's move, the relationship had become strained over a provision of the companies' nuclear joint venture deal. EDF was concerned that Constellation would exercise an option to sell its non-nuclear power plants to the French company for up to $2 billion.

After a public spat, the companies reached an agreement under which Constellation would not exercise the so-called put option. In exchange, EDF transferred 3.5 million shares to Constellation and gave up its seat on the Constellation board.

Constellation also sold its 50 percent stake in the UniStar nuclear-development company to EDF, allowing the French company to pursue Calvert Cliffs 3 on its own — though federal law prohibits the ownership of nuclear plants by foreign entities. (EDF said it was looking for a U.S. partner.)

In questioning Exelon's Crane, EDF attorney Martin Flumenbaum pointed out that Constellation would not have been a merger target had it still been involved with new nuclear development.

"Did you read anything in the trade press about the battle between EDF and Constellation escalating?" Flumenbaum asked Crane.

"No. My thought when we read that the loan guarantee process had stopped [was] that it was agreed upon that the plants weren't going to be built. That was a de-risking factor to motivate me further to want to contact Constellation, specifically Mr. Shattuck," Crane answered. "I believe that nuclear plants could not be built and it would be risky to the corporation to do so and we wouldn't enter into any deal when someone was building nuclear or [was] responsible" for part of a nuclear facility.

"Had you communicated that to Mr. Shattuck prior?" Flumenbaum asked.

"No."

EDF senior consultant Jeffrey Johnson is scheduled to take the stand on Wednesday to make the case that the joint nuclear power venture would lose autonomy if Constellation were bought by Exelon.

EDF also argues that Exelon has not made a commitment to maintain Constellation Energy Nuclear Group's 1,100 employees in Maryland, including 200 in Baltimore.

Exelon's Crane said there were no plans to change the way the business is managed or its location.

Exelon has said that EDF would not be harmed by the merger and that the French company's approval was not required for the merger to proceed.